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Module: Money and Banking
Origin and Growth of Commerical Banking
Mr. Aamir waheed
Department of Commerce
Origin the word Bank derived from an italian word
“Banque” which means a “bench”.
The other point of view originated from the german
word “banc” which means a joint stock firm.
According the present day banker has three
stages
The Merchants
The Goldsmits
The Money Lenders
Ch 1 -2
Evolution of Banking
The Merchants
The merchants were traders in commodities. The
trading activates were carried on by them from one
place to another. It was risky for the traders to
carry metallic money with themselves for payment.
The traders with high reputation began to issue
receipts which were accepted as titles of money.
these receipt or letters of transfer first mode of
payment.
Ch 1 -3
The Goldsmiths
Goldsmith in india is called “seths” used to receive
gold and silver for safe custody. they began to
issue receipts for the metallic money (gold and
silver) kept with them. These receipts with the
passage of time became payable to the bearer on
demand. In this way the goldsmits’note became a
medium of exchange and means of payment.
Ch 1 -4
The Money Lender
By experience the goldsmits came to know that
they could keep a small proportion of the total
deposits for meeting the demands of customers for
cash and the rest they could easily lend. They
allowed the depositors to draw over and above the
money actually standing to their credit.
Ch 1 -5
The first central bank was formed in Geneva in
1578. Bank of England was established in 1694.
The modern commercial banking system actually
developed in the 19th century.
With the passage of time, the scope of the banks
have greatly increased. E.g obtaining funds,
advancing loans to businesses, farmers,
household, making investment in stocks.
Ch 1 -6
Commercial Banks
A bank is a firm which collect money from those
who have it spare. It lends money to those who
require it.
A bank is a firm that takes deposits from
household and firms and makes loan to other
household and firms.
Ch 1 -7
Functions of Commercial bank
Basic Functions
Secondary Functions
Ch 1 -8
Basic Functions
Accepting of Deposits
Bank is to accept deposits from those who can
save but cannot make profitable use of their
savings themselves. In order to attract the saving
from different persons and institutions, the bank
maintain the following types of account
Current account
Saving Account
Fixed Deposit Account
Ch 1 -9
Making Loans
The 2nd major function of commercial bank is to
make loans to businessmen, traders, exporters,
households etc. these loans are made against
documents of title to goods, marketable securities,
personal security of the borrowers etc. The
strength of the bank is primarily judged by the
soundness of its advances.
Ch 1 -10
Loans
The commercial banks grants short and long term
loans to individuals, firms and companies mostly
against securities.
Cash credit
The banks advance long term loans to the
commercial and industrial units against the
security of goods. The borrower is permitted to
draw within the cash credit limit sanctioned by the
bank. The interest is charged only on the amount
of money withdrawn by the borrower.
Ch 1 -11
overdraft
A customer may arrange with his bank to permit
him to over-draw on his current account known as
overdraft(OD) the bank allows customer to
overdraw his account up to a certain limit on
providing a security.
Whenever the customer has surplus funds, he may
pay such funds into current account. Interest
charged on daily basis on the overdrawn amount.it
is short term loan.
Ch 1 -12
Discounting of bills
The bank also makes loans to their customers by
discounting bill of exchange. It is a method of short
term financing provided by banks. The bank
purchases a trade bill from the payee before the
maturity date and pays the bill amount after
deducting service charges from it. At the maturity
of the bill, the bank recovers the said amount from
the drawee.
Ch 1 -13
Secondary Functions
Special Financial Services
banks are now offering international services such as
currency exchange, issue of letter of credit. Now every
banks also offering ATMs and electronic fund transfer.
Agency Functions
Collection of cheques
Collection of dividends
Purchasesale of securities
Execution of standing instructions
Ch 1 -14
Role in the Economic
Development of a country
Bank promote capital promotion
Bank play important role in raising of the financial
resources. They encourage saving by giving various types
of incentives to the savers. They expand branches of the
banks in rural and urban areas and mobilize saving even at
far of places. These savings are the made available to the
businesses which make use of them for productive purpose
in the country. The bank are therefore not only store
houses of the country’s wealth, but also provide stream of
resources necessary for economic development.
Ch 1 -15
Investment in New Enterprises
Businessmen normally hesitate to invest their money in
risky enterprises. The commercial banks provide short and
long term loans to entrepreneurs to invest in new
enterprises and adopt new methods of productions. The
provision of timely credit increase the productive capacity
of the economy.
Promotion of Trade and Industry
The use of bank draft, cheque, bill of exchange, credit card
etc has revolutionized both national and international trade.
Ch 1 -16
Development of Agriculture
In developing countries are now providing credit for the
development of agriculture and small scale industries in
rural areas. The provision of credit to agriculture has
greatly helped in raising agricultural productivity and
income of the farmers.
Balanced development of different regions
They help in transferring surplus capital from developed
regions to less developing region. The traders, industrialists
etc of less developed regions are able to get adequate
capital for meeting their business needs which help in
development of economy of the country.
Ch 1 -17
Influencing the economic activity
The bank can also influence the economic activity of thr
county through its influence on availablity of credit and rate
of interest.
Implementation of Monetary Policy
The central bank of the country control and regulates volum
of credit through the active cooperation of the banking
system in the country.it helps in bringing price stability and
promotes economic growth within the shortest possible
period of time.
Ch 1 -18
Monetization of the economy
The commercial banks by opening branches in the rural
and backward areas are reducing the exchange of goods
through barter. The use of money has now greatly
increased the volume of production of goods.
Export Promotion Cells
In order to increase the export of the country, the banks
have established export promotion cells. They provide
information about general trade and economic conditions
both inside and outside the country to its customers
Ch 1 -19
Virtual Banking
The use of on line banking in 21st century is on the increase
and it has brought revolution in the banking industry. The
banks providing the banking services through extensive
use of information technology without direct recourse to the
bank by the customer. It is called virtual banking. These
services include ATMs, Electronic Fund Transfer, POS,
smart cards, phone banking and internet banking.
Ch 1 -20
Classification of Banks
Classification on the basis of Functions
Central Bank
Commercial Banks
Exchange Banks
Saving Banks
Agricultural Banks
Industrial Banks
.
Ch 1 -21
Classification on the basis of Ownership
Public Sector Bank
Private Sector Banks
Cooperative Banks
. Classification on the basis of Domicile
Domestic Bank
Foregin Banks
Scheduled and Non Scheduled Banks
Ch 1 -22
Features of an efficient Bank
Safety
Greater Liquidity
Depositors Confidence
Maximum Profitibality
Other criteria to judge the efficiency
Money at call and short notice
Investment of funds
Loan and advances
Discounting of Bills
.
Ch 1 -23
Commercial Bank Credit
Credit
Derived from the latin word “credo” means “I trust you”
An exchange which is complete after the expiry of a certain
period of time after payment.
Credit is the right to receive payment or the obligation to
make payment on demand or at some future time on
account of an immediate transfer of good.
Ch 1 -24
Functions of Credit
The main functions which arises from the use of credit are
below
1. Economy in the use of Metal.
2. Provision of working capital
3. Sales of Bonds
4. Case of Young firms
5. Large scale of Production
6. Shifting of capital to Productive hands
7. Entrance of new Entrepreneurs
8. Purchase of Goods
9. International Payments
10. Sate Revenue
Ch 1 -25
Dangers of Credit
If the delicate weapon of credit is not properly regulated and controlled,
it has its inherent dangers too
1. Over issue of Credit
2. Bad debts
3. Inefficient Business concerns
4. Monopolistic Exploitation
5. Borrowing by Government
Ch 1 -26
Cash Reserve of Bank
It is the liquid form of asset. It is to be kept by a bank in its vault and
with the central bank of the country in order to meet the demands of
the customers. Cash reserves include
 Cash in Hand
 Cash kept in Central bank
 Cash kept in other Banks
Cash reserve is regarded as the bank’s first line of defense to ward off
bankruptcy
How much a bank should maintain cash reserves varies from time to
Time .
Ch 1 -27
The main factors governing cash reserves
are as under
1. Legal requirements
2. Nature and size of deposit
3. Nature of advances and Investment
4. Habits of Customers
5. Facilities of clearing House
6. Banking facilities
7. Area of Operation
8. Political conditions
Ch 1 -28
Do Banks Create Credit?
Creation of credit does not mean minting of money. It is the expanding
Of money supply by banks by taking in deposit and making loans. It is
Open secret that bank advance a major portion of their deposit to the
borrowers and keep smaller par of the payment to the consumers on
demand.
“This tendency on the part of the commercial banks to make loans
several times of the excess cash reserves kept by the banks is
called creation of credit”
Ch 1 -29
Process of Credit Creation
Ch 1 -30
Process of Credit Creation
Ch 1 -31
Dangers of Credit Creation
1. Cash Drain
2. Transfer of Deposit to non bank financial
Institutions
3. Willingness to borrow
4. Different types of loans
Ch 1 -32
Many Thanks
Ch 1 -33

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MB Week8 by Aamir waheed.ppt money and ban

  • 1. Module: Money and Banking Origin and Growth of Commerical Banking Mr. Aamir waheed Department of Commerce
  • 2. Origin the word Bank derived from an italian word “Banque” which means a “bench”. The other point of view originated from the german word “banc” which means a joint stock firm. According the present day banker has three stages The Merchants The Goldsmits The Money Lenders Ch 1 -2 Evolution of Banking
  • 3. The Merchants The merchants were traders in commodities. The trading activates were carried on by them from one place to another. It was risky for the traders to carry metallic money with themselves for payment. The traders with high reputation began to issue receipts which were accepted as titles of money. these receipt or letters of transfer first mode of payment. Ch 1 -3
  • 4. The Goldsmiths Goldsmith in india is called “seths” used to receive gold and silver for safe custody. they began to issue receipts for the metallic money (gold and silver) kept with them. These receipts with the passage of time became payable to the bearer on demand. In this way the goldsmits’note became a medium of exchange and means of payment. Ch 1 -4
  • 5. The Money Lender By experience the goldsmits came to know that they could keep a small proportion of the total deposits for meeting the demands of customers for cash and the rest they could easily lend. They allowed the depositors to draw over and above the money actually standing to their credit. Ch 1 -5
  • 6. The first central bank was formed in Geneva in 1578. Bank of England was established in 1694. The modern commercial banking system actually developed in the 19th century. With the passage of time, the scope of the banks have greatly increased. E.g obtaining funds, advancing loans to businesses, farmers, household, making investment in stocks. Ch 1 -6
  • 7. Commercial Banks A bank is a firm which collect money from those who have it spare. It lends money to those who require it. A bank is a firm that takes deposits from household and firms and makes loan to other household and firms. Ch 1 -7
  • 8. Functions of Commercial bank Basic Functions Secondary Functions Ch 1 -8
  • 9. Basic Functions Accepting of Deposits Bank is to accept deposits from those who can save but cannot make profitable use of their savings themselves. In order to attract the saving from different persons and institutions, the bank maintain the following types of account Current account Saving Account Fixed Deposit Account Ch 1 -9
  • 10. Making Loans The 2nd major function of commercial bank is to make loans to businessmen, traders, exporters, households etc. these loans are made against documents of title to goods, marketable securities, personal security of the borrowers etc. The strength of the bank is primarily judged by the soundness of its advances. Ch 1 -10
  • 11. Loans The commercial banks grants short and long term loans to individuals, firms and companies mostly against securities. Cash credit The banks advance long term loans to the commercial and industrial units against the security of goods. The borrower is permitted to draw within the cash credit limit sanctioned by the bank. The interest is charged only on the amount of money withdrawn by the borrower. Ch 1 -11
  • 12. overdraft A customer may arrange with his bank to permit him to over-draw on his current account known as overdraft(OD) the bank allows customer to overdraw his account up to a certain limit on providing a security. Whenever the customer has surplus funds, he may pay such funds into current account. Interest charged on daily basis on the overdrawn amount.it is short term loan. Ch 1 -12
  • 13. Discounting of bills The bank also makes loans to their customers by discounting bill of exchange. It is a method of short term financing provided by banks. The bank purchases a trade bill from the payee before the maturity date and pays the bill amount after deducting service charges from it. At the maturity of the bill, the bank recovers the said amount from the drawee. Ch 1 -13
  • 14. Secondary Functions Special Financial Services banks are now offering international services such as currency exchange, issue of letter of credit. Now every banks also offering ATMs and electronic fund transfer. Agency Functions Collection of cheques Collection of dividends Purchasesale of securities Execution of standing instructions Ch 1 -14
  • 15. Role in the Economic Development of a country Bank promote capital promotion Bank play important role in raising of the financial resources. They encourage saving by giving various types of incentives to the savers. They expand branches of the banks in rural and urban areas and mobilize saving even at far of places. These savings are the made available to the businesses which make use of them for productive purpose in the country. The bank are therefore not only store houses of the country’s wealth, but also provide stream of resources necessary for economic development. Ch 1 -15
  • 16. Investment in New Enterprises Businessmen normally hesitate to invest their money in risky enterprises. The commercial banks provide short and long term loans to entrepreneurs to invest in new enterprises and adopt new methods of productions. The provision of timely credit increase the productive capacity of the economy. Promotion of Trade and Industry The use of bank draft, cheque, bill of exchange, credit card etc has revolutionized both national and international trade. Ch 1 -16
  • 17. Development of Agriculture In developing countries are now providing credit for the development of agriculture and small scale industries in rural areas. The provision of credit to agriculture has greatly helped in raising agricultural productivity and income of the farmers. Balanced development of different regions They help in transferring surplus capital from developed regions to less developing region. The traders, industrialists etc of less developed regions are able to get adequate capital for meeting their business needs which help in development of economy of the country. Ch 1 -17
  • 18. Influencing the economic activity The bank can also influence the economic activity of thr county through its influence on availablity of credit and rate of interest. Implementation of Monetary Policy The central bank of the country control and regulates volum of credit through the active cooperation of the banking system in the country.it helps in bringing price stability and promotes economic growth within the shortest possible period of time. Ch 1 -18
  • 19. Monetization of the economy The commercial banks by opening branches in the rural and backward areas are reducing the exchange of goods through barter. The use of money has now greatly increased the volume of production of goods. Export Promotion Cells In order to increase the export of the country, the banks have established export promotion cells. They provide information about general trade and economic conditions both inside and outside the country to its customers Ch 1 -19
  • 20. Virtual Banking The use of on line banking in 21st century is on the increase and it has brought revolution in the banking industry. The banks providing the banking services through extensive use of information technology without direct recourse to the bank by the customer. It is called virtual banking. These services include ATMs, Electronic Fund Transfer, POS, smart cards, phone banking and internet banking. Ch 1 -20
  • 21. Classification of Banks Classification on the basis of Functions Central Bank Commercial Banks Exchange Banks Saving Banks Agricultural Banks Industrial Banks . Ch 1 -21
  • 22. Classification on the basis of Ownership Public Sector Bank Private Sector Banks Cooperative Banks . Classification on the basis of Domicile Domestic Bank Foregin Banks Scheduled and Non Scheduled Banks Ch 1 -22
  • 23. Features of an efficient Bank Safety Greater Liquidity Depositors Confidence Maximum Profitibality Other criteria to judge the efficiency Money at call and short notice Investment of funds Loan and advances Discounting of Bills . Ch 1 -23
  • 24. Commercial Bank Credit Credit Derived from the latin word “credo” means “I trust you” An exchange which is complete after the expiry of a certain period of time after payment. Credit is the right to receive payment or the obligation to make payment on demand or at some future time on account of an immediate transfer of good. Ch 1 -24
  • 25. Functions of Credit The main functions which arises from the use of credit are below 1. Economy in the use of Metal. 2. Provision of working capital 3. Sales of Bonds 4. Case of Young firms 5. Large scale of Production 6. Shifting of capital to Productive hands 7. Entrance of new Entrepreneurs 8. Purchase of Goods 9. International Payments 10. Sate Revenue Ch 1 -25
  • 26. Dangers of Credit If the delicate weapon of credit is not properly regulated and controlled, it has its inherent dangers too 1. Over issue of Credit 2. Bad debts 3. Inefficient Business concerns 4. Monopolistic Exploitation 5. Borrowing by Government Ch 1 -26
  • 27. Cash Reserve of Bank It is the liquid form of asset. It is to be kept by a bank in its vault and with the central bank of the country in order to meet the demands of the customers. Cash reserves include  Cash in Hand  Cash kept in Central bank  Cash kept in other Banks Cash reserve is regarded as the bank’s first line of defense to ward off bankruptcy How much a bank should maintain cash reserves varies from time to Time . Ch 1 -27
  • 28. The main factors governing cash reserves are as under 1. Legal requirements 2. Nature and size of deposit 3. Nature of advances and Investment 4. Habits of Customers 5. Facilities of clearing House 6. Banking facilities 7. Area of Operation 8. Political conditions Ch 1 -28
  • 29. Do Banks Create Credit? Creation of credit does not mean minting of money. It is the expanding Of money supply by banks by taking in deposit and making loans. It is Open secret that bank advance a major portion of their deposit to the borrowers and keep smaller par of the payment to the consumers on demand. “This tendency on the part of the commercial banks to make loans several times of the excess cash reserves kept by the banks is called creation of credit” Ch 1 -29
  • 30. Process of Credit Creation Ch 1 -30
  • 31. Process of Credit Creation Ch 1 -31
  • 32. Dangers of Credit Creation 1. Cash Drain 2. Transfer of Deposit to non bank financial Institutions 3. Willingness to borrow 4. Different types of loans Ch 1 -32